Monday, March 17, 2008

Merger or consolidation? NYU’s absorption of Brooklyn’s Polytech is about engineering--and land

They’ve called it a merger, an affiliation, a joining of two institutions.

But the planned--and nearly consummated--deal between Polytechnic University, a small engineering school at Brooklyn’s MetroTech that draws mainly on local students, and New York University (NYU), the ever-growing, Greenwich Village-based university with international reach, looks like a consolidation.

Given that NYU would ultimately absorb Poly with no money down, but, among other benefits, offer a loan based on Poly’s real estate--a provision barely discussed publicly--it also has elements of a leveraged buyout.

Then again, its proponents expect synergies would produce a whole larger than the sum of its parts.

Poly,  with about 3300 students, would be eventually consolidated into the 40,000-student NYU, as its board members are replaced over ten years.

Both university's boards have given their approval, but before the State Board of Regents gives its approval in May or June, a State Senator must finish investigating charges that the agreement is a sweetheart deal.

Carrot and stick

Public rhetoric from the parties has obscured the fact that the consolidation began with both a carrot and a stick.

In early February 2007, NYU President John Sexton approached his Poly counterpart, Jerry Hultin, offering to resolve some of the issues that previously stymied a merger, but also warning that NYU would start a competing school of engineering, a field it gave up in 1973.

The Dibner Library at MetroTech
Promoted as a win-win for both institutions, the deal may be a bigger win for NYU. Poly alumni who question the deal say call it a land grab--though a definitive analysis is impossible, given that details of the deal remain confidential.

Poly, with a $135 million endowment and some prime real estate, is worth hundreds of millions of dollars--alumni suggest $500 million.

But NYU wouldn’t pay out any cash initially, even though it likely would have to spend hundreds of millions of dollars to start its own engineering school or gain a beachhead in Brooklyn. (NYU's endowment is more than $2.5 billion.)

Rather, NYU would offer Poly the benefits of its larger platform and loan Poly money, perhaps $50 million at the start (according to an NYU source in the Times), based on the engineering school’s unused air rights, boosted by the city's Downtown Brooklyn rezoning.

There should be other financial benefits: NYU has a better bond rating, lowering the cost of borrowing, and greater capacity to support new construction; Poly has signed a letter of intent regarding its air rights with developer Forest City Ratner, its MetroTech neighbor, but has not begun new buildings.

The deal is a source of contention at Poly, while a blip on the radar screen at NYU. (Note that the oval near the green space in the graphic above indicates another Poly building with high-rise development rights.)

Outraged Poly alumni warn that the engineering school would lose control of its assets after a transition period of a decade and call for a more equitable arrangement with guaranteed investments.

Poly Board Chairman Craig Matthews, citing confidentiality, would not discuss financial details, though NYU’s Sexton has acknowledged that money from Poly assets would not go to NYU for at least 10 years, according to a 10/10/07 Washington Square News article.

Full disclosure?

Poly’s own “Merger Central” web site obscures the financial issue. An FAQ sounds definitive, stating that "The real estate development rights will reside with the Polytechnic Institute of NYU.” 


However, the FAQ addresses only “the interim state wherein Polytechnic becomes a corporate entity—the Polytechnic Institute of NYU.” It doesn’t speak to what happens after the interim state, when Poly becomes "a school of engineering and technology within NYU," as an NYU statement describes it.

A 9/4/07 interview in the Polytechnic Reporter quoted Hultin as saying that NYU agreed to several fundamentals, including that “The endowment and real estate will be dedicated to Poly use.” 


Does that prevail beyond the interim? Matthews told me financial details are confidential. (He told the Brooklyn Daily Eagle, “The air rights are protected” but wouldn't provide further details.)

Poly would gain the umbrella and cross-pollination of a larger university, and significant potential increase in revenue: improved opportunities for grant funds and a larger and better-qualified student body, compounded by NYU’s higher (by about 20%) tuition. 



Rogers Hall meets academic building at Jay Street
NYU’s is $35,283 tuition plus $11,780 room and board, while Poly’s is $29,894, plus $10,500. (Engineering schools generally have higher costs.) NYU students receive fewer Pell Grants; while NYU has said it will continue to help needy students, Poly alumni have questioned the level of that commitment.

While Poly isn’t on the rocks, its progress hasn't been steady. Poly has improved financially, Matthews said, but its fund-raising ability remains “somewhat limited” and it hasn’t met “targets in increased enrollment, retention, and research committed.” 


Thus the advantages: “Faculty sees enormous potential in collaborative research grant applications, cross teaching and other exposure. Students see benefits in an NYU-related degree. The Board sees the potential for a financially stronger institution. It was an opportunity not to be missed allowing us to accelerate our Strategic Plan Goals.”

Matthews suggests the timing is right. He told the Chronicle of Higher Education that, once Poly’s bond payments come due in 2011, “someone could bargain with us with our backs against the wall... Right now we have the wind in our sails."

“In addition, entities are offered opportunities when they happen and they must be examined for their benefit,” he added in his message to me.

The FCR land deal

The Jacobs Administration Building
For NYU, it's a chance to acquire perhaps one quarter of the 6 million square feet it seeks by 2031 for expansion. More than half of that square footage consists of those unused air rights. 


Poly already has signed a letter of intent with Forest City Ratner regarding “the majority” of its air rights, according to Matthews. 

Poly, in fact, was FCR’s partner in building MetroTech beginning in the early 1980s, and Poly’s buildings are literally across the (demapped) street from FCR corporate headquarters at One Metrotech.


The deal with FCR would involve 800,000 square feet of space, according to a 2006 “Future of Poly” plan presented by Hultin. 



Klitgord Auditoriam is low-rise building
next to Poly's Othmer dormitory
(How much is that worth? A real estate professional I spoke with estimated the value of development rights in Downtown Brooklyn as $75-$100 per square foot, which suggests a top value of $80 million. However, the cost of land is much higher in Manhattan.)

That’s enough to build two towers the size of the Bank of New York building at Atlantic Terminal. Add that to a campus of 650,000 square feet and Poly could provide 1.45 million square feet of NYU's goal of 6 million square feet. 



Then again, the real estate market is in flux; a tower (aka "Mr. Brooklyn") planned by Forest City Ratner in partnership with City Tech, adjacent to Poly on the site of Klitgord Auditorium , has just fallen through.

Hultin told students last November, "We have been working with City Tech from the start and teamed with Forest City Ratner to ensure the Poly building and City Tech buildings compliment each other as well as the whole MetroTech area.”



Has the setback at City Tech changed Poly's plans? Matthews said that design of new structures and the mix of uses remains under discussion.

Votes of approval

Craig Matthews, photo from Poly News


A few members of the Poly board have raised questions. While a February 7 "Sense of the Board" vote indicated more than a supermajority (75%) supported the merger, according to a statement from Matthews, the vote was postponed a month, so State Senator Kenneth LaValle's State Senate Committee on Higher Education could investigate charges raised by three dissident trustees, including conflict of interest, failure to do due diligence, secret negotiations, and failure to consult faculty. (Inside Higher Ed offers a good account of charges and responses.)

A supermajority of the board voted March 7 to approve the deal; Poly issued an exuberant press release in which Hultin called it "a perfect fit between two great universities." 



Jerry Hultin, photo from Poly News
The vote came without hearing from LaValle; Matthews noted that the board answered LaValle's questions and hadn't heard any request from him to delay the vote. However, LaValle told the New York Times that it was “presumptive of them to move ahead without waiting for the report to be finished.”

One question raised publicly was whether NYU was legally bound not to re-enter the engineering field. “Our research as well as that of the Alumni Association has failed to discover any non-compete documents," Matthews said.

As the Times reported February 8, the board “reprimanded the leaders of the alumni association for bringing their concerns to Senator LaValle, and for sharing a confidential memo written by three trustees, who had asked the board to postpone the vote.” 



Dibner Library
The board agreed no one could talk to the press without permission from Matthews or Hultin. Edward S. Sawchuk, executive vice president of the alumni association, called the move a “‘gag order.”

What faculty think

Matthews' February 7 statement noted that the board “also met in executive session today with the Polytechnic University faculty leadership, who affirmed their strong support of the merger.” Tenured faculty would be protected, unlike in a proposed merger in 2004, when Poly faculty voted no.

The dissident trustees called for a secret ballot by faculty; Inside Higher Ed suggested that administrators indicated the board didn’t want a vote. For tenured faculty, the chance to be part of a larger institution must be attractive, while non-tenured faculty, along with perhaps some administrative staffers, may see a truncated future in a merged institution.

Jonathan Soffer, a tenured history professor, told me that, though he thinks there should have been a vote by faculty, the deal promises "not only financial stability, but library resources and being part of a great university." While some other university mergers have not gone well, "it seems worth the risk."

"My support for the deal was not predicated on any prospect of massive investment by NYU, though Poly needs investment," he said. "It’s the intangibles of the deal. Investment may be easier to come by if donors know their money is going to a more established university like NYU, for example. It seems uncertain whether Poly could take on even larger projects in the future by itself, though we certainly need more space. It’s not that I have any illusions about NYU, but I’m not persuaded that this is a giveaway, or that there’s some golden future for Poly on its own." And New York, he said, needs a great technological university to compete in the world market.

Othmer Hall
Could this be a better deal for NYU than Poly? "It may be in true in terms of corporate assets, but in terms of lives of faculty and students, no."

A history in Brooklyn


Poly, founded in 1854 as Brooklyn Collegiate and Polytechnic Institute, was consolidated into a new campus in the 1950s, including buildings of the American Safety Razor Company.


It received a boost in 1973, when NYU, then struggling financially, closed its engineering school in the West Bronx neighborhood of University Heights as part of an agreement with state regulators; many of its faculty wound up at Polytech. (The NYU campus became Bronx Community College.)

Poly helped launch MetroTech in 1982 and broke ground for the new Dibner Library in 1990, A $175 million bequest in 1998 from former faculty member Donald Othmer and his wife boosted its endowment. In 2001, the longtime commuter school broke ground for its first dormitory, a 20-story, 400-bed facility named for the Othmers on Johnson Street next to the Klitgord Auditorium.

Talks in 2004

In ensuing decades, NYU boomed and, recently, has felt the pressures to both add an engineering school as well as expand its campus. In 2004, merger talks between NYU and a weaker Polytech. 


Likely a factor for NYU in the 2004 discussions was the passage of the Downtown Brooklyn rezoning, a boon for Poly.

The city’s plan stated:
Two blocks at Tillary, Johnson, Jay and Adams Streets that contain the New York City College of Technology, a Polytechnic University dormitory and Westinghouse High School, currently zoned C6-1 (6 FAR), and Polytechnic University’s portion of the MetroTech campus, currently zoned C6-1A (6 FAR), are proposed to be rezoned to C6-4 (10 FAR).
The rezoning would facilitate new mixed-use academic and office buildings. The proposed zoning change would allow the NYC College of Technology and Polytechnic University to expand their academic facilities and develop revenue-producing office buildings within their campuses.


FAR means floor area ratio; 6 FAR means that a building covering the whole lot could be built six times the lot size, or a building covering half the lot could go up 12 floors. A rezoning from 6 FAR to 10 FAR represents an increase of 4 FAR, or 67%. In Poly’s case, given that several of its buildings are not built to the full floor area ratio, the potential is even greater.

Veiled language as merger emerges

Both NYU and Poly, in initial public statements last August 7, were vague about the contours of the deal.

In the NYU statement, Sexton and Provost David McLaughlin announced that the two parties had “resumed discussions, left off three years ago, on a possible merger,” also described as “the joining of our two institutions.” 



Dibner Library meets MetroTech Commons
NYU’s expansion plans were barely hinted at: “Wouldn’t this location in Brooklyn - so vibrant and so near our own location in Manhattan - be a wonderful neighborhood of which to be a part in the future?”

The Poly statement, from Hultin, Matthews, and Provost Erich Kunhardt, asserted that the institutions “share key values,” also “have a need for the other,” given the complementary nature of their academic missions, and could “better fulfill” their ambitions “[a]s two universities joined.”

Not quite voluntary

More candor emerged in a letter, dated August 21, in which Matthews and Hultin responded--often in detail but sometimes evasively--to extensive questions posed by the alumni. 



It appears on a web site set up by the alumni association: “John Sexton approached Jerry [Hultin] about six months ago as to NYU's continued commitment to develop an engineering and technology school and offered that if they could not develop something with Poly, they would build one from scratch.”

Wasn’t there an element of coercion, I asked Matthews. He responded: “NYU made it clear to us that they considered alignments with other engineering schools in the region but Poly was the only one they wanted to pursue. They felt it essential that they have an engineering school [if] they were to be a 'complete technological university.’ They did indicate, that if we decided not to proceed with them, there was no one else with whom they desired to affiliate and were prepared to start an engineering school from the ground up. We read that as an honest reflection of their intentions.”

Money questions

In the letter, Hultin and Matthews acknowledged that Poly had no operating deficit and didn’t project a deficit for the next two years. The school’s endowment was $135 million, its mortgage debt $118 million. Private gifts and bequests averaged $7.5 million over the past four years. Asked about an audit of total assets, the leaders noted that the information had been discussed with the board.

“Will NYU pay out any cash in exchange for becoming the sole Member of the corporation which owns the assets...?” the alumni asked.

The response: “No cash will be paid.”

How hard had Poly tried to right its ship without NYU? “[W]e have engaged consultants to assist the board and management in making decisions as to the future of Poly; these consultants have not been asked to opine on the merger specifically,” the answer stated. 



Rogers Hall
“We have had alliance discussions with Stevens, SUNY, Cooper Union and others but we could not reach mutually beneficial terms. We have done appraisals of our real estate and understand that the remaining value is minimal after considering all outstanding debt and the cost to lease or build new space if the property were sold. We have done studies to determine the cost of having a truly outstanding campus and facilities which cost far exceeds our fund raising ability. "


"We have considered selling the dormitory or having others run it. We have negotiated air rights to optimize the value of the real estate we have. We have completed studies as to our future space needs and the cost to put Rogers Hall in proper condition. We hired a consultant to apprise us as to the practicality of a major fundraising campaign. We have spoken with the Polytechnic Alumni Association as to their commitment to double the giving level and completed a strategic plan that outlines core goals and measurable objectives. And we hired a new president, many new senior staff members, substantially increased the size of the board and much more.”

It would be interesting to see the appraisals of real estate that determine that the remaining value is minimal. It’s unclear that the value of the real estate has been fully optimized, given that later in the document, Hultin and Matthews acknowledged, “We will consider proposals from NYU that augment the value of our development (air) rights.”

Wunsch Hall
(At right, Wunsch Hall, housed in a historic church, retains some air rights.)

At a meeting with students last November, Hultin was asked if there’s a dollar amount that would stop the deal. He said, “A gift of $300-$400 million would turn our heads. We could build a national brand with that money.”

Timing issues

How long would consolidation take? Specifics haven’t been released, but Hultin told the students, “Poly will serve as the engineering/technology school arm of NYU the start. The entire process of becoming a formal school can take 3-7 years depending on many factors.”

The Chronicle of Higher Education said a memorandum of understanding “calls for a gradual merger over several years” and noted that, while NYU could control Poly’s endowment, most of the money is restricted, so it couldn’t be used for larger NYU purposes. The real estate question wasn't answered.

Why now?

“If Polytechnic is now a viable entity, what is the rush to consummate this transaction?” the alumni asked in the letter.

Hultin and Matthews didn’t really answer regarding the pace of negotiations, instead pointing back to the general argument for the deal. Asked why the merger now, according to the 9/4/07 Polytechnic Reporter, “Hultin cited three key reasons why talks got under way: donors could not be found during the past two years who were willing to make a contribution sufficient to ensure the university’s future, lagging undergraduate enrollment, and a serious decline in research grants necessary to support the school’s activities.”

Unmentioned was the veiled threat offered by NYU, issued some eight months after Hultin announced ambitious growth plans in a July 2006 document called “The Future of Poly” (right). Hultin predicted 800,000 square feet of high-rise construction. Construction of a new building was to begin in the fiscal year starting July 2008.

The August 21 letter from Hultin and Matthews to alumni stated, “The Board believes it has considered every reasonable alternative. Nevertheless, if the merge is not consummated, we will aggressively pursue the goals of our strategic plan, recognizing it will take much longer and the outcome is not assured.”

As for consultation, the "many major donors” contacted by the administration all said they will continue to support Poly, according to Hultin and Matthews. (One longtime contributor, commenting on the NYU school newspaper web site, said he’d change his will.)

The alumni response

While some alumni do support the consolidation, most do not. In a September 6 position paper sent to the Board of Trustees, George Likourezos, president of the Alumni Association, called the process “stealth” and the terms “extremely one-sided in favor of NYU, and constitute a waste of Polytechnic’s assets.”

While Likourezos acknowledged that only “sharp cuts in staff and programs” had led to a balanced budget, “Polytechnic is rich both in physical assets (with few liabilities appurtenant to those assets) and intellectual assets…. These assets should not be given away in a transaction that offers no firm and binding commtment for value received, and which risks the extinction of Polytechnic’s rich 153 year legacy.”

“There is nothing in the MCC [Memorandum of Core Commitments] to prevent NYU from disposing of Polytechnic’s highly valuable real estate in the future, as has just occurred in a striking similar situation involving Fordham University and Marymount College of Tarrytown, NY,” Likourezos warned. (Fordham acquired Marymount in 2000 and shut it in 2007.)

“There is absolutely no plan to sell Poly’s facilities,” NYU spokesman John Beckman told the Brooklyn Paper, without ruling out the possibility. “The agreement assumes that the Poly site will continue to be the home of the engineering program.”

Who’s in control?

Likourezos suggested a conflict of interest: “The Administration has acknowledged that NYU has guaranteed President Hultin a five-year term as president of New Poly.” 


Is that so? Matthews responded, “President Hultin's contract with Poly ends June 30, 2008 and it has not been extended as of this date until the merger is settled. NYU has no contract with him but has expressed publicly their interest in having him continue to run Poly."

Likourezos raised the touchy admission of whose standards would prevail. Given that “NYU has indicated no intention to dilute its SAT average,” it would seem that Polytech would change significantly. “Clearly, Polytechnic now routinely gives opportunities to students who might otherwise not have the wherewithal to pursue and engineering degree.”

Money concerns

In a September 23 supplement to the position paper, Likourezos again protested that “NYU will have sole unfettered ownership of Polytechnic’s assets,” that the deal “fails to specify concrete, specific investments,” and noted that the alumni organization had not been provided with numerous requests, including records regarding air rights.

Noting that a Poly board member projected the cost of Rogers Hall renovations at $200 million, the memo suggested that figure as a benchmark. Further, it argued that the Memorandum of Understanding (MOU)--an apparent successor to the MCC--set specific investments independent of Poly’s assets, to transform the school to a top-level engineering institution.

That $200 million “must be followed by annual investments, e.g., in the range of $50-$65 million for the first 15 years.” That suggests nearly a billion dollars: $200 million + $750 million. (Hultin, remember, said that $300 million could stop the deal.)

“Without such an investment commitment and timetable, Polytechnic is merely walking away from its academic and financial predicament by handing over its keys to NYU without the cash, facilities, and infrastructure required to succeed,” the memo said.

A September 29 letter from an attorney for the Alumni Association complained that “[t]he most glaring omission remains the absence of a financial commitment from NYU." The letter from Daniel S. Steinberg raised some of the same questions raised in large land use deals like the Atlantic Yards project, suggesting the costs and benefits were opaque.

Compromise position?

The alumni may have moderated their position. A December 3 statement on the alumni web site states that "the Definitive Agreement should provide that Poly's assets and endowments not be commingled with those of NYU or any surviving institution for at least 10 years past the date that full integration of the two schools is completed."

In other words, assuming Poly would be integrated over ten years, that suggests that Poly's assets would be maintained for the school's use only for 20 years, as opposed to the request in Likourezos's September 23 memo, which requested that "Polytechnic Assets to Remain Forever Polytechnic Assets." (I was unable to confirm if the December 3 statement overrides the September 23 memo.)

Candor emerges

Hultin and Matthews issued a statement October 10 that was more candid about the governance issue, saying both boards “approved our continuing to move forward toward a merger of Polytechnic and NYU, with the long-range goal of Poly becoming a school of engineering and technology within NYU.” (Emphasis added) 



Matthews called it a strategic partnership.” An October 11 statement by NYU’s Sexton and McLaughlin used similar “within NYU” language.

NYU's ambitions

Some details about NYU’s ambitions emerge in documents concerning NYU Plans 2031, a milestone year that will be the university’s 200th anniversary. According to the overview:
By spring of 2008, the University expects to have developed a plan which will guide its future development in the Washington Square/Union Square/East Village area and throughout the City.

An open house presentation from September 2007 laid some groundwork about the need for 6 million gross square feet of new space in New York City over the next 25 years, half academic space, half housing.

An open house presentation dated January 30, 2008 spelled things out more explicitly, citing three locations within commuting distance that are strong candidates for future Remote Centers. Two allow for incremental growth and expansion of existing facilities, while one would allow for the creation of a totally new academic center. They are:
Downtown Brooklyn, where Polytechnic University is located, as well as an NYU graduate dormitory.
The Health Center Corridor along 1st Avenue between East 24th Street and East 34th Street.
Governors Island which has the potential to become a future Remote Center with academic space and housing for students and faculty.

In Fall 2007 NYU announced it is pursuing an af´Čüliation with Polytechnic University, located in Downtown Brooklyn. This provides new opportunities for NYU to build upon the strengths of Polytechnic and its academic presence to develop a new mixed use center in Downtown Brooklyn. There are a number of development opportunities in Downtown Brooklyn that could be considered by the University as future expansion sites.

There are also development opportunities on the Poly campus, notably the air rights. "They're an asset that Poly has," NYU Provost McLaughlin told the Washington Square News in October, "and it's conceivable that Poly might sell those air rights or some portion of them to other parts of NYU to use for other purposes, such as housing."

"Downtown Brooklyn has significant real estate options that would be possible for NYU to work with," Hultin told the Washington Square News. "So you could see a bigger presence for NYU in downtown Brooklyn, whether with our air rights or available real estate.”

Whether the revenue from Poly's air rights would support the engineering school remains unclear. 


Should it do so, the deal looks better for Poly. If not, the larger school, which has faced little internal controversy over the consolidation decision, may have achieved an ever better deal. 

But the consolidation is about more than revenue, so, assuming it goes forward, it may take years to assess the true value of the deal.

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